The Automatic Earth

Unknown Daniels-Wells Pontiac, 3055 Broadway, Oakland 1938

Chaos assured in Europe as per Jan 1. Elections January 25. Expect crazy stuff from Samaras and Brussels. We’ll hear Armageddon a lot.

• Greece Faces Snap Election as Samaras Fails to Install President (Bloomberg)

Greece faces snap elections early in the New Year after Prime Minister Antonis Samaras failed in his third and final attempt to persuade parliament to back his candidate for head of state. With voting continuing in Athens today, more than 121 lawmakers in the 300-seat chamber refused to support Samaras’s nominee for president, Stavros Dimas, ensuring that he’ll fall short of the 180 votes required. Under the constitution, the legislature will now be dissolved and a date for elections set within the next 10 days. The prospect of early parliamentary elections as soon as Jan. 25 has roiled financial markets in Greece, evoking memories of the height of the financial crisis in 2012 when the country’s euro membership was in jeopardy.

The benchmark Athens Stock Exchange slumped the most among 18 western-European markets ahead of the vote. The anti-austerity Syriza party led by Alexis Tsipras is ahead of Samaras’s New Democracy movement in opinion polls. Samaras, who failed to gather enough support for Dimas in two previous rounds of voting on Dec. 17 and Dec. 23, called on lawmakers before today’s session to avert a dissolution of parliament, saying that snap elections posed a danger to the country. Heading a coalition of 155 lawmakers, he’d offered to form a broader administration and hold early parliamentary elections at the end of 2015 if lawmakers backed his nominee. His coalition’s term doesn’t expire until June 2016.

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Bring in the Plunge Protectors.

• Greek Stocks Tank After Presidential Vote (CNBC)

Greek stocks tumbled over 10% on Monday, after Greek politicians failed to elect a president in a key vote, paving the way for a snap election. Stavros Dimas, the Greek government’s preferred candidate, secured only 168 votes in the third round of voting on Monday, short of the 180 needed to avoid a snap election. Greece’s main stock market fell 11% on the news, while the country’s 10-year bond yields spiked above 9%. Ahead of the vote, the euro slipped to a near-28-month low against the dollar. The result of the vote came as no surprise to analysts, who had not expected Prime Minister Antonis Samaras’ candidate Dimas to get the required votes.

Elena Panaritis, a former MP for Greek social democratic party PASOK, told CNBC on Monday tat the country was heading for snap elections. There are fears that if a snap general election takes place in early 2015, Greece’s popular anti-austerity Syriza party may be elected. This could put the country’s international bailout into jeopardy, as the party has promised to scrap Greece’s tough austerity policies if it gets into power. The unpopular cost-cutting measures are a condition of the country’s bailouts – worth €240 billion ($296 billion) – implemented by the International Monetary Fund, European Central Bank and European Commission.

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OK overview.

• ‘Life Will Go On’ Thesis About Global Economy Might Not Work In 2015 (Guardian)

Russia is in crisis. There are concerns about the eurozone. Japan is struggling to emerge from stagnation. Booming stock markets seem divorced from economic reality. The Anglo-Saxon economies are outpacing the other developed economies of the west. This is the world as it exits 2014. But it was also the world as it was 15 years ago during a month in which the first major anti-globalisation protests took place on the streets of Seattle and preparations were made for the nonexistent millennium bug. Oil prices were low. Banks could lend money cheaply. There was talk of how technology would power a new industrial revolution. It would be a mistake, though, to think that nothing has really changed. The story of the past decade and a half is of the increasingly desperate attempts to prevent the Great Stalling of the global economy. Rock-bottom interest rates have failed to prevent growth rates from slipping. Living standards in many countries are back to the levels of the early 2000s.

Securing international cooperation to tackle climate change, to open markets to trade, to manage currencies or to create jobs has become increasingly difficult. The problems of 1999 are still the problems of 2014, but more serious and seemingly more intractable. There is no shortage of explanations for what has gone wrong and what needs to be done to put things right. One view, popular with central bankers and technologists, is that all that is needed is a bit of time. Seen from this perspective, the world is on the brink of the sort of technological shift that happens once in every 50 or 60 years. The transition, however, has been delayed by the structural changes in the global economy caused by the collapse of communism a quarter of a century ago.

Adjustment to these geopolitical shifts, such as the rise of China, is taking longer than expected but will eventually happen. Another view is that the zombie-like state of the global economy is owing to a lack of structural reform. Here there is common cause between the German government, which blames the eurozone crisis not on a lack of demand but on supply-side impediments to growth, and the free market economists who say the financial crisis of 2007-08 was caused by over regulation. The solution, therefore, is to make markets work better through reforms that sharpen incentives to work, dilute labour rights, cut taxes, reduce government spending, balance budgets and push back against growing protectionist tendencies.

Then there is the Keynesian view of the world. Here, the idea is return, as far as possible, to the world as it existed in the golden years of the 1950s and 1960s. That means governments rethinking their austerity programmes; keeping interest rates low; using redistribution to spread the fruits of growth more evenly; and returning to the sort of managed currency regime that existed until the early 1970s. What is common to the explanations is that they believe there is a short-term (sometimes a medium-term) fix that will put matters right. Growth and a steady increase in living standards has been a feature of the modern industrial world, stretching back to the 18th century: it is quite a stretch to believe that 250 years of progress have come to a halt. As a result, the assumption is that eventually the global economy will achieve escape velocity following several years in the post-global recession doldrums.

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Emerging markets on their way to the bottom.

• Distressed Debt Losses Worst Since ’08 Credit Crisis on Oil Rout (Bloomberg)

Emerging-market distressed debt losses are the worst this month since the global financial crisis. Bank of America Merrill Lynch’s Distressed Emerging Markets Corporate Plus Index fell 13.4% through Dec. 26, set for its worst performance since October 2008, as a tumble in the price of oil sparked a currency crisis in Russia. That brought this year’s decline to 19.7%, the most in six years. Emerging markets accounted for 14 of the 56 global defaults this year in Standard & Poor’s coverage. Crude reached the lowest in five years earlier this month and is heading for its largest annual decline since 2008 as members of the Organization of Petroleum Exporting Countries resist production cuts to defend market share. A supply glut has also pushed metal and coal prices deeper into a bear market.

“With many moving parts to the equation, could there be a point where investors begin to interpret the circumstances as contagion?” said David Tawil, co-founder of New York-based Maglan Capital LP. “What happens if we need to add Venezuela and Russia to the mix? Contagion is good for no one.” Oil accounts for 95% of Venezuela’s exports and its government bonds have suffered as President Nicolas Maduro said he has no plans to curb fuel subsidies. Economic sanctions are also hurting Russia, pushing the country toward a recession, while corruption probes induced bond losses in Brazil and China. In Indonesia, the Bakrie family group of companies put its coal unit, PT Bumi Resources, under court protection.

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So Yellen hikes rates, and then buys up all Treasuries Kuroda-style?

• US Bond Sentiment Worst Since Disastrous ’09 as Fed Shifts (Bloomberg)

Get ready for a disastrous year for U.S. government bonds. That’s the message forecasters on Wall Street are sending. With Federal Reserve Chair Janet Yellen poised to raise interest rates in 2015 for the first time in almost a decade, prognosticators are convinced Treasury yields have nowhere to go except up. Their calls for higher yields next year are the most aggressive since 2009, when U.S. debt securities suffered record losses, according to data compiled by Bloomberg. Getting it right hasn’t been easy. Almost everyone who foresaw a selloff this year as the Fed ended its bond buying was caught off-guard as lackluster U.S. wage growth and turmoil in emerging markets propelled Treasuries to the biggest returns since 2011.

Now, even as the bond market’s inflation outlook tumbles, forecasters are sticking to the view that Treasuries are a losing proposition as the economy strengthens. “Next year should be the break-out year finally,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, said by phone from New York on Dec. 23. “The market is ignoring the rhetoric that Yellen and the FOMC is getting closer and closer to tightening. The market has it wrong.” Rupkey, who is among the 74 economists and strategists surveyed by Bloomberg this month, has one of the highest projections. He said he expects 10-year yields to rise to 3.4% by the end of 2015 from 2.25% at 12:55 p.m. in Tokyo.

Back in January, Rupkey said yields would be 3.6% by now. The median forecast calls for yields to reach 3.01% during the same span. The roughly 0.75 percentage point increase would be almost twice as much as forecasters anticipated for 2014. Combined with projections for yields on the two-year note to more than double to 1.53% and those on the 30-year bond to rise 0.89 percentage point to 3.70%, the prognosticators are more bearish than any time since heading into 2009. That’s when they predicted yields on every debt maturity would rise more than a percentage point as the U.S., helped by the Fed’s easy-money policies, started to recover from its worst economic crisis since the Great Depression. Treasuries lost 3.7% that year in the biggest slide dating back to 1978.

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Investors are still not completely stupid.

• The 94% Plunge That Shows Abenomics Losing Global Investors (Bloomberg)

Foreign investors have had just about enough of Abenomics. After pumping record amounts of cash into Japanese shares last year, they’ve hardly added to holdings in 2014. Inflows are down 94% this year to 898 billion yen ($7.5 billion), on pace for the smallest annual amount since the 2008 global financial crisis. The month of April 2013 alone registered almost three times as much foreign investment in the stock market as all of 2014. These figures provide the clearest look at how global investors have become disillusioned with Prime Minister Shinzo Abe after he pushed through a tax increase in April that sent Japan into recession. Fund managers from Sumitomo Mitsui to MV Financial say to lure investors back, Abe needs to move beyond short-term stimulus and start enacting the structural changes he laid out in his initial plan, dubbed Abenomics, to end Japan’s two-decade economic malaise.

“We need to see a framework where growth isn’t dependent on monetary easing,” Ayako Sera, a market strategist at Sumitomo Mitsui, which oversees $325 billion in assets. “If not growth, then at least a way to increase productivity. For now there’s nothing like that, so I imagine it’ll be hard for stocks to keep going higher and for foreigners to take an interest in them.” Purchases of the nation’s shares through Dec. 19 by investors outside Japan were less than a tenth of the 15.1 trillion yen they bought last year, according to data from the Tokyo Stock Exchange. Trust banks, which typically trade on behalf of pension funds, added 2.7 trillion yen, after offloading about 4 trillion yen of equities in 2013. Individuals were net sellers for a fourth straight year.

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Deflation tests.

• Japan’s Regional Banks Face Stress Test For Ultra-Low Rates (Reuters)

Japan’s financial regulator is running stress tests to see if too much cash in the system is stifling smaller banks’ ability to earn, unlike regulatory tests elsewhere that have been designed to see whether lenders had enough capital to cope with financial shocks. Two people with direct knowledge of the process said the Financial Services Agency (FSA) had initiated the tests on concerns that with 10-year Japanese government bond yields near a record low around 0.3%, regional lenders in particular could be at risk as the gap between what they pay for deposits and what they collect on loans and bond holdings shrinks.

The action highlights one of the unintended risks of Prime Minister Shinzo Abe’s programme to end decades of deflation with the support of the Bank of Japan (BOJ), which by injecting monetary stimulus into the economy is helping to keep interest rates at rock bottom. Critics say policymakers in Europe should be considering such risks, too. The European Central Bank completed a review of the resilience of euro zone banks in October and came under fire for not including a deflationary scenario in its stress test hypotheses, even though inflation and bond yields in much of the region are hovering barely above zero. ECB Vice President Vitor Constancio defended the omission by arguing that a “deflation (scenario) is not there because indeed we don’t consider that deflation is going to happen”.

It was not immediately clear what scenario or assumptions the FSA was using in its assessment of the risk to regional and smaller banks, nor how the agency would follow up with lenders that appeared to be at particular risk from a period of persistently low, long-term interest rates. Japan’s more than 100 regional banks account for around 40% of the country’s $4.6 trillion in outstanding loans, but overall loan demand has shrunk 10% over the last 20 years. Such banks, which typically serve smaller businesses, have seen lending fall as Japan’s population ages, and many have cut the interest rates they charge to win business.

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But what about the pretense? How many zombies can they blow up before it starts hurting and cascading?

• Zombie Bankruptcies Top New Year Wish-List for China’s Brokerages (Bloomberg)

Bond brokerages have a New Year’s resolution proposal for China’s policy makers: allow more defaults among so-called zombie companies. The extra yield on three-year AA rated debt over top-ranked notes surged 47 basis points this month to Dec. 25, the most for any month since October 2011, even after China’s first onshore bond payment in March failed to trigger a shakeup in the market. Borrowers graded at or below that rating need to repay a record 632.3 billion yuan ($101.6 billion) of notes in 2015, up 71% from 2014, China International Capital data show.

President Xi Jinping, who delivers a year-ahead address on Jan. 1, must balance the need to support an economy set for its slowest growth in more than two decades with reining in the world’s biggest corporate liabilities that Standard & Poor’s estimates stood at $14.2 trillion in 2013. Haitong Securities and Fitch say that will require greater use of bankruptcy laws. “Zombie companies will face higher borrowing costs, which will force more failures,” said Li Ning, a bond analyst in Shanghai at Haitong, the nation’s second-biggest brokerage. “That’s a good thing for the economy because allowing more defaults is a necessary step in building a sound financial asset pricing system.”

Haitong Securities’ Li said the number of bond defaults may increase next year and investors should shun lower-rated corporate debt because their yield premium over top-rated notes may rise. Zombie companies are using up too many lending resources, Liu Shiyu, who was deputy governor at the People’s Bank of China and is now chairman of Agricultural Bank of China, said earlier this year. In the only one onshore default China has had, investors didn’t lose a cent. Shanghai Chaori, which failed to make a full coupon payment in March, repaid all the principal and interest for its 1 billion yuan of bonds on Dec. 22. “It’s necessary to let those zombie companies default,” said Wang Ying, an analyst at Fitch Ratings in Shanghai. “If there is no real default, risks will never be priced in a correct way. Without a correct risk pricing mechanism, zombie companies can still survive by getting loans from banks.”

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That quickly withdrawn paper yesterday gave it all away. 3.5% trade growth.

• China Slashes Trade Target For 2015 To 6% (MarketWatch)

China has cut its target for the growth of external trade to 6% for 2015, compared with a 7.5% target this year, the China Daily reported Monday. The paper cited Gao Hucheng, the minister of commerce, without saying where he made the remarks. With imports in particular falling short of expectations, China looks certain to miss this year’s target. In the first 11 months of 2014, total trade was up just 3.5% year-over-year in U.S. dollar terms, according to Dow Jones Newswires’ calculations. That is considerably slower than the official growth rate of the entire economy, which expanded 7.4% from a year earlier in the first three quarters.

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Sure the FBI is only too happy to chase some rich Chinese around.

• China Looking At Deal With US To Recover Dirty Assets (Reuters)

China is looking at signing an agreement with the United States to target assets illegally taken out of China by corrupt officials, a newspaper said on Monday, as the government tightens the screws in its anti-graft battle. China has vowed to pursue a search, dubbed Operation “Fox Hunt,” beyond its borders for corrupt officials and business executives, and their assets. But Western countries have balked at signing extradition deals with China, partly out of concern about the integrity of its judicial system and treatment of prisoners. Rights groups say Chinese authorities use torture and that the death penalty is common in corruption cases.

The state-run China Daily said the central People’s Bank of China was talking to the U.S. Treasury Department’s Financial Crimes Enforcement Network about signing an agreement targeting ill-gotten assets held in the U.S. China is set to finalize a similar deal with Canada, Chinese state media reported this month. The central bank was also looking at a deal with Australia, the China Daily said, citing Zhang Xiaoming, deputy head of the Finance Ministry’s legal assistance and foreign affairs department. “After the agreements are made, China will share intelligence with the U.S. and Australia, which will also offer information to their enforcement agencies to conduct further investigations,” Zhang told the English-language paper.

“Once law enforcement officers in the U.S. and Australia identify illegal funds, they will immediately initiate judicial procedures to freeze and confiscate those criminal proceeds in their countries.” The United States, Canada and Australia are popular locations for corrupt officials to transfer their assets, the paper added. But legal problems have prevented China from getting these assets back, Zhang said. “Although the U.S. Federal Bureau of Investigation or Australian police have traced the assets and collected enough evidence to identify them as ill-gotten gains, they are unable to take immediate measures to freeze and confiscate them due to the lack of asset restraining orders from the Chinese courts.”

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Creative accounting.

• China First-World Quandary Exposed as $800 Billion Lending Freed (Bloomberg)

China’s central bank is joining the balancing act of developed-world counterparts as it moves to free up at least $800 billion in funds for lenders, seeking to support growth without further inflaming financial risk. The world’s largest emerging market will broaden the definition of a deposit in 2015, boosting the lending capacity of Chinese banks that have to cap loans at 75% of funds held. The relaxation, reported by the official Xinhua News Agency yesterday, could make an additional 5 trillion yuan ($800 billion) to 5.5 trillion yuan available, according to analysts at Credit Agricole CIB and Guotai Junan Securities Co.

“The change in rules allows the extension of additional loans worth half of this year’s new lending,” said Dariusz Kowalczyk, an economist at Credit Agricole CIB in Hong Kong. “Policy makers across the globe are trying to boost demand by increasing bank lending, especially to businesses, so in this sense China’s efforts to boost lending fit well into the picture.” Central bankers worldwide are hunting for new ways to stimulate investment as elevated debt levels in developed nations stifle the scope of governments to respond and record-low borrowing costs limit room for monetary maneuvering. As global policy makers grapple with concern that asset bubbles are a by-product of increased liquidity, the People’s Bank of China’s challenge is supporting growth sufficiently to avoid political discontent while discouraging a renewed borrowing binge in the world’s second-largest economy.

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They’re just killing the whole economy on purpose.

• Kiev Targets Oligarchs With Budget Bill (FT)

Recession-battered and war-torn Ukraine overhauled its business-choking tax system early on Monday, promising to lower the burden on small businesses and lower-income citizens while closing loopholes long exploited by oligarchs. The package of legislation adopted after 9 p.m. London time on Sunday also envisions increases in import duties to help stabilize stretched state finances and counter a balance of payments crisis. The laws will form the revenue-boosting backbone of an austerity-packed 2015 budget that officials hope will unlock fresh multibillion-dollar bailouts from the IMF and other western donors. In a 4:15 a.m. vote during the extraordinary Sunday-into-Monday session of parliament, Ukraine’s lawmakers adopted the budget, cutting subsidies and government spending.

Though many lawmakers complained the government did not show them a final version of the draft budget before voting, they were under pressure to adopt it before the end of this year in order to swiftly re-engage with the IMF. With fears of a financial meltdown spreading after central bank reserves halved this year to about one month of import coverage, the IMF concluded this month that Ukraine would need $15 billion of additional support on top of its existing $17 billion loan program. The tax legislation was only adopted after 10 hours of grueling negotiations that tested the unity of a pro-western coalition. It aims to bolster small and medium-sized businesses, reduce a massive shadow economy and squeeze what officials described as a fairer share of revenue out of oligarch-owned businesses.

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Kudos? Excuse me?

• Fed and ECB: Kudos And Problems Ahead (CNBC)

It seems to me that the Fed should speed up the removal of a mind-boggling inflationary potential presented by its bloated balance sheet. The latest numbers show that during the two weeks between November 26 and December 10, the Fed shrank its balance sheet by $56.3 billion. That brought the monetary base down to $3.7 trillion, a $315.1 billion decline from its peak of last August. These liquidity withdrawals had no negative impact on U.S. money and capital markets: The federal funds rate remained well below its 0.25% target, and the yield on the Treasury’s benchmark ten-year bond closed at 2.25% last Friday. I expect to see the Fed accelerating asset reductions in the weeks and months ahead.

The European Central Bank (ECB) is in a completely different situation as a result of the weak cyclical position of the euro area economy. With the monetary union’s growth rate of 0.9% in the first nine month of this year, and the bank loans to the private sector falling at an average annual rate of 1.3% in the three months to October, the ECB has to maintain its exceptionally loose monetary policy in the months ahead. But the ECB needs no additional liquidity creation. The euro area markets are already swimming in liquidity. The problem is in an inadequate bank lending to businesses and households. Banks are gun-shy because of bad credit risks in a stagnant economy. Their balance sheets are also closely (maybe too closely) monitored by the regulatory authorities.

That means that the ECB’s most urgent and important task is to fix its dysfunctional transmission mechanism between monetary policy and real economy. The ECB’s other problem is an apparent expectation of some euro area governments that the central bank will do the heavy lifting for them. True to form, Germans are issuing stern warnings to countries (France and Italy) accused of dragging their feet on structural reforms while pushing for even looser monetary policies. German taskmasters may have a point here because it does seem that advocates of greater liquidity are the ones seeking to avoid the political fallout from unpopular reforms.

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“Kissinger argued that the West – with its strategy of pulling Ukraine into the orbit of the European Union – was responsible for the crisis by failing to understand Russian sensitivity over Ukraine ..”

• The Liberal Idiocy on Russia/Ukraine (Robert Parry)

Among honest and knowledgeable people, there really isn’t much doubt about what happened in Ukraine last winter. There was a U.S.-backed coup which ousted a constitutionally elected president and replaced him with a regime more in line with U.S. interests. Even some smart people who agree with the policy of going on the offensive against Russia recognize this reality. For instance, George Friedman, the founder of the global intelligence firm Stratfor, was quoted in an interview with the Russian liberal business publication Kommersant as saying what happened on Feb. 22 in Kiev – the overthrow of President Viktor Yanukovych – “really was the most blatant coup in history.”

Brushing aside the righteous indignation and self-serving propaganda, Stratfor’s Friedman recognized that both Russia and the United States were operating in what they perceived to be their own interests. “The bottom line is that the strategic interests of the United States are to prevent Russia from becoming a hegemon,” he said. “And the strategic interests of Russia are not to allow the U.S. close to its borders.” Another relative voice of reason, at least on this topic, has been former Secretary of State Henry Kissinger who – in an interview with Der Spiegel – dismissed Official Washington’s conventional wisdom that Russian President Vladimir Putin provoked the crisis and then annexed Crimea as part of some diabolical scheme to reclaim territory lost when the Soviet Union collapsed in 1991.

“The annexation of Crimea was not a move toward global conquest,” the 91-year-old Kissinger said. “It was not Hitler moving into Czechoslovakia” – as former Secretary of State Hillary Clinton had suggested. Kissinger noted that Putin had no intention of instigating a crisis in Ukraine: “Putin spent tens of billions of dollars on the Winter Olympics in Sochi. The theme of the Olympics was that Russia is a progressive state tied to the West through its culture and, therefore, it presumably wants to be part of it. So it doesn’t make any sense that a week after the close of the Olympics, Putin would take Crimea and start a war over Ukraine.” Instead Kissinger argued that the West – with its strategy of pulling Ukraine into the orbit of the European Union – was responsible for the crisis by failing to understand Russian sensitivity over Ukraine and making the grave mistake of quickly pushing the confrontation beyond dialogue.

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A curious NY Times piece mostly made up of innuendo and slander, but which has a few relevent lines. What the Times seeks to insinuate is that German companies ‘cool on Russia’ because they no longer trust the country, whereas in reality it’s sanctions that force them out.

• In Reversal, Germany Cools to Russian Investment (NY Times)

The uncertainty hanging over Germany’s strong business ties with Russia, which are more than double the value of Russian trade with the United States, is in marked contrast to the optimism and relative stability of recent years. And it has been reflected in increasingly acrimonious exchanges in Germany’s political, diplomatic and intellectual elite over how to shape relations with Moscow. Last weekend, the two most prominent Social Democrats in Chancellor Angela Merkel’s grand coalition government of center right and center left — the party leader, Sigmar Gabriel, and the foreign minister, Frank-Walter Steinmeier – voiced concern that sanctions might hobble the stricken Russian economy, and they opposed tightening them.

Ms. Merkel, clearly frustrated with the behavior of President Vladimir V. Putin of Russia, has so far taken a harder line. But the potential for conflict within Ms. Merkel’s government complicates her efforts to use Germany’s close ties with Russia as leverage to fashion a solution to the crisis in Ukraine. Business groups, normally strong backers of Ms. Merkel’s Christian Democrats, have agreed with the Social Democrats on Russia and warned against using economic means to put pressure on Mr. Putin. “Sanctions are not the proper means to resolve this political crisis,” Eckhard Cordes, a former Daimler executive who is chairman of the Committee on Eastern European Economic Relations, which represents companies doing business in the former Soviet bloc, said in an email. “The West cannot have an interest in destabilizing the Russian economy or Russian politics.”

[..] Political tensions are likely to intensify as sanctions against Russia come up for renewal in March, a year after Moscow annexed Crimea. “Anyone who believes that forcing Russia economically to its knees will lead to more security in Europe is wrong,” Mr. Steinmeier, the foreign minister, told the weekly newsmagazine Der Spiegel. Having Russia’s economy in chaos “cannot be in our interest,” he added. Mr. Gabriel, the leader of the Social Democrats, said pointedly that calls for intensifying sanctions were wrong. Gerhard Schröder, Ms. Merkel’s predecessor as chancellor and an avowed friend of Mr. Putin, was among 60 prominent signatories of an appeal entitled, “Again War in Europe?/Not in Our Name.”

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Okay, and I say Merkel should influence Kiev.

• Russia Must Influence Separatists To End Ukraine Crisis, Says Merkel (Reuters)

German Chancellor Angela Merkel appealed to the Russian government on Sunday to use its influence on separatists in eastern Ukraine to implement a ceasefire plan agreed in Minsk in September aimed at ending the conflict. Planned talks involving Russia, Ukraine and the Organisation for Security and Cooperation in Europe to further the ceasefire arrangements have not yet taken place. “(Merkel said) A stabilization of the situation can only come if the agreed contact lines are finally implemented,” said a spokeswoman in a statement. “She appealed to the Russian government to use its influence on the separatists to this end,” said the spokeswoman. In a phone call with Ukrainian President Petro Poroshenko late on Saturday, Merkel expressed regret that the contact group talks had not happened.

Last week, Poroshenko had said the talks would take place on Dec. 24 and 26. Merkel, who has been closely involved in diplomatic efforts to resolve the crisis, also welcomed the exchange of prisoners between the Ukrainian government and separatists. The September truce has been flouted by both sides but violence in eastern Ukraine has decreased during December, raising hopes of further talks. The uprising by the separatists, who oppose Kiev rule and want a union with Russia, began after Russia annexed the Black Sea peninsula of Crimea from Ukraine in March. The pro-Western authorities in Kiev accuse Russia of orchestrating the uprising but the Kremlin denies it is behind the revolt.

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Long piece from Syriza advisor Varoufakis on the origins of the euro.

• In Lieu Of Best Wishes: The Euro’s First Inkling (Varoufakis)

As 2015 is approaching, seemingly pregnant with crucial challenges for Europe, the euro and all those who have to live with it, I could not think of a better seasonal offering for readers of this blog than a suitable extract from my next book. I chose a piece that narrates, and interprets, the story of the first time the euro was proposed in the highest echelons of European decision making. Hope you enjoy it. With wishes for a 2015 worth remembering fondly.

An Indecent Proposal Kurt Schmücker was a man not given to strong emotions. But on the morning of March 23rd 1964 he could hardly trust his ears and only barely managed to contain his astonishment. As Germany’s Minister of the Economy, Herr Schmücker was used to meeting, regularly, with his French counterpart, Valerie Giscard d’ Estaing, President Charles De Gaulle’s finance minister and a man who would, ten years later, become President of France himself. So, when Giscard dropped by his Bonn office, for a two-hour chat, Minister Schmücker was relaxed, anticipating another anodyne meeting, like all previous get-togethers whose real purpose was to put on a show of European unity between the two erstwhile foes shouldering the burden of constructing a European Union at the early stages of its development.

Schmücker and Giscard normally exchanged polite views on how each saw the economic policies of the other, on how the two countries dealt with movements of money across their borders, on interest rates and trade balances, on their attitudes toward taxing business and, of course, on their joint efforts at cementing a European Union still in its infancy. Occasionally they would also swap tales of woe on their tense relations with their own central bankers, the Bundesbank and the Banque de France. Nothing, in other words, that might have prepared Herr Schmücker for what he was about to hear. But, that morning, once the obligatory niceties had been dispensed with, Giscard came out with a shocking proposal: France and Germany should create a common currency, inviting the other four members of the European Union to join in when and if they were ready.

It took Schmücker a few moments to recover his composure. What on earth was the aristocratic Frenchman saying? Germany and France sharing the same banknotes, the same coins, the same Central Bank? Which one? The Bundesbank? For heavens sake!, he is certain to have cried out inside his own head. Outwards, he put on a face of somber iciness, pretending not to have been taken aback. Indeed, the record shows that he responded as if he had not heard the earth-shattering proposition. Why not be more modest, he countered? Why don’t we just try to stabilize our exchange rates through our central banks and on the basis of (a conservative German’s wet-dream) “strict discipline” and “contractual rules”?

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What a shame.

• Winston Churchill’s Family Begged Him Not To Convert To Islam (Ind.)

The family of Sir Winston Churchill urged him to “fight against” the desire to convert to Islam, a newly discovered letter has revealed. The Prime Minister who led Britain to victory in World War Two was apparently so taken with Islam and the culture of the Orient that his family wrote to try and persuade him not to become a Muslim. In a letter dated August 1907 Churchill’s soon to be sister-in-law wrote to him: “Please don’t become converted to Islam; I have noticed in your disposition a tendency to orientalise, Pasha-like tendencies, I really have. “If you come into contact with Islam your conversion might be effected with greater ease than you might have supposed, call of the blood, don’t you know what I mean, do fight against it.”

The letter, discovered by a history research fellow at Cambridge University, Warren Dockter, was written by Lady Gwendoline Bertie who married Churchill’s brother Jack. “Churchill never seriously considered converting,” Dr Dockter told The Independent. “He was more or less an atheist by this time anyway. He did however have a fascination with Islamic culture which was common among Victorians.” Churchill had opportunity to observe Islamic society when he served as an officer of the British Army in Sudan. In a letter written to Lady Lytton in 1907 Churchill wrote that he “wished he were” a Pasha, which was a rank of distinction in the Ottoman Empire. He even took to dressing in Arab clothes in private – an enthusiasm he shared with his good friend the poet Wilfrid S. Blunt. But Dr Dockter thinks Churchill’s family need never have worried about his interest in Islam.

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Good read.

• The American Civil War: The Bloody Anniversary We All Forgot (Fisk)

Every month, my London mail package thumps on to my Beirut doorstep with An Cosantóir inside. It’s the magazine of the Irish Defence Forces – surely the glossiest-paged journal of any army, let alone one of the smallest military forces in the world. But among its accounts of Ireland’s UN missions abroad – think Golan, for example, with Syria’s civil war crashing around Irish soldiers – almost inevitably each month, there’s a piece of history we’ve forgotten. For while the start of the Great War of 1914-18 has been commemorated to the point of spiritualism these past 12 months, who remembers that this week we enter the 150th anniversary year of the end of the American Civil War?

In US history, it is a profound event that we should all remember; here, after all, lie the original bones of the Union, its victory consecrated among some of the units whose soldiers were sent to their deaths in Iraq in 2003, its brutality ghosted into the future narrative of American military records, its equalities reflected in the large number of black soldiers who died in present-day Mesopotamia. But for the Irish, too, the civil war of 1861-1865, is a sombre anniversary. They reckon that 210,000 Irish soldiers fought in British uniform in the First World War, and that 49,300 were killed. Yet almost as many Irishmen fought in the American Civil War – 200,000 in all, 180,000 in the Union army, 20,000 for the Confederates.

An estimated 20% of the Union navy were Irish-born – 26,000 men – and the total Irish dead of the American conflict came to at least 30,000. Many of the Irish fatalities were from Famine families who had fled the desperate poverty of their homes in what was then the United Kingdom, only to die at Antietam and Gettysburg. My old alma mater, Trinity College Dublin, is collating the figures and they are likely to rise much higher as Irish academics mine into the American Compiled Military Service Records for the regiments of both sides.

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